High Gas Prices Got you Down?

WalletGasThe average price of a gallon of regular unleaded is approaching an all time high, and it isn’t even Summer yet!  The official U.S. average price is $3.22 a gallon, but just yesterday, my local pumps displayed $3.45 (maybe a good time to buy that Prius)!  Why are gas prices so high?  Will they ever come down to a level we can comfortable tolerate?  I took a look at the DOE / EPA joint website so you don’t have to…

What We Pay For in a Gallon of  Regular Gasoline (November 2006), Retail Price: $2.23/gallon, Refining (15%), Distribution & Marketing (8%), Taxes (20%), Crude Oil (57%). According to the Energy Information Administration, 57% of the cost of a gallon of gas (as of November ’06) came from the raw material itself – Black Gold, Texas Tea.  Refinement of the oil to make the gas comprised another 15%.  Tack on another 8% to pay for distribution and marketing.  The last 20%?  Your friend and mine, local, state and Federal taxes (thanks a lot, Washington!).  If these same ratios still hold today, nearly 70 cents of every gallon of gas that gets pumped into your tank has nothing to do with the product itelf.  Remove the taxes, and we’re right back under $2.75 a gallon.

But 20%, while a good chunk of change, isn’t the reason why we’re seeing the highest prices ever.  Barrels of crude oil are now at record prices ($109.92 a barrel!), and show no signs of stopping.  Why have we seen such a growth in oil prices?  According to John Stepek of MoneyWeek.com, the answer is simple economics – supply and demand. 

But in the meantime, too many of us are still underestimating the sheer level of demand growth that the world is facing. As Jeroen Van der Veer, chief executive of Royal Dutch Shell says: “China and India are entering the energy-intensive phase of their development. This is the point when people buy their first television or car, or board a plane for the first time.”

As The Telegraph’s Tom Stevenson adds: “Given the developed world’s addiction to oil, what is surprising is not that China’s oil demand is doubling every 10 years, but that it is not growing even faster.”

So simply put, developing nations of the world want oil as much as we do.  OPEC and other oil producing countries aren’t increasing their production.  Why should they?  Would you decrease the number of units you make if it was still selling like hotcakes?

What to do?  We could try and balance the supply and demand equation by reducing our demand.  But that’s not practical, especially if all your doing is commuting to work or running to the store to by groceries…  But that hasn’t stopped the Feds from pushing higher CAFE standards.  Well meaning regulations that have serious unintended consequences are what Congress does best.  This is one of them.

What about increasing supply?  That may be easier.  I’m sure we’ve all heard the term ANWR, which is short for Arctic National Wildlife Refuge.  But that alone wouldn’t supply enough to meet our demand, even if certain members of Congress would allow it.  Offshore drilling?  Ethenol?  That topic alone could fill a blog!  And all of these options are long-term.  Negotiating with OPEC, Canada, and other suppliers of oil to increase supply?  Perhaps, but that’s never worked well historically either.

So I guess the short term solution is to grin and bare it.  It’s just another plan by the man to keep us Middle Classers down!

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